Has the Tide Turned?
In the nearly 20 years I have been involved in this industry, the portion of the profits paid to agents and ISOs by processors has for the most part increased, as have the related perks like free equipment and cash bonuses. However recently that has changed with the trend towards fee based income as it relates to merchant accounts. Below I will discuss the historical changes to the computation of compensation to agents, how fee based income is now reducing such compensation and things to look for to make sure you as a sales agent keep as much compensation as you can.
When I first started working in the industry in the mid-1990s, the sales agent that I was working with was paid the princely sum of $3.00 per merchant per month for the every merchant account. This was paid regardless of whether the merchant was a small one processing just a few transactions per month or a market processing thousands of transactions a month. Most sales agents in those days did not understand the money to be made off the processing side of the business. They were too busy making thousands of dollars from leasing revenue to care about processing.
As time went on, the word got out that there was money to be made on the processing side, partially due to the large sums being paid for such companies and the market value of the publicly-held ones. Also, as time went on some of the leasing companies began to fail and free equipment programs sharply reduced the ability of sales agents to get merchants to pay for equipment. So sales agents and ISOs began to demand a higher percentage of the profits derived from the merchants’ processing.
Thus, the profit-split type of compensation plan was born for sales agents. Processors began to offer the sales agents a percentage of the profits that were derived from the merchants processing after taking out third party costs like interchange. But like with most things at first, the sales agents may not have been getting a true percentage of the profits.
The usually standard compensation level was a 50-50 split between the processor and the sales agent. But 50% of what? Some processors did not pay on all types of transactions omitting payment on mid and non qual transactions. Some inflated the third party costs they were using to determine the profits split to reduce the sales agents’ true share of the profits.
But the more knowledgeable sales agents and ISOs soon caught on and many demanded a percentage of the “true” profits that were based on all revenue derived from the merchants’ processing without any markup on the costs. And these sales agents also increasingly demanded more of the profits with 70% paid to the sales agents and then finally with the highest standard rate for sales agents topping out at 80%. The tide had been moving in the sales agents’ favor throughout this time period and eventually leveled out and remained at 80% for the past number of years.
The Tide Turns:
As fee-based income has developed over the last few years with annual fees, then PCI fees and more recently regulatory compliance type fees, the tide has started to turn on the sales agents. Some processors have decided that these new fees are not covered in existing contract; so they have opted not to share them in the same percentage as other fees. Some processors have paid a smaller percentage of the profits from those fees to the sales agents other than the 80% they might be entitled to from other revenues. Some have instituted a buy rate for such fees to cover the processors costs of implementing things like PCI compliance internally and also to cover the expense of getting merchants PCI complaint.
The upshot has been that the processors are earning much more of this fee based income than the other processing income as it relates to their sales agents. Given there has been intense pricing competition on interchange and transaction fee income, this means that the sales agents overall portion of the profits derived from the merchant is shrinking at a fairly rapid rate. The tide has turned in favor of the processors who are reaping the rewards of switching to a more fee based income model by capturing a great proportion of the overall profits derived from the merchant relationship.
Slowing the Tide:
To slow the tide, the sales agents need to look to the future in negotiating their agent agreements. The first thing to incorporate into the contract is that the sales agent should be paid on all revenue derived from the merchants, not just the items listed on the typical schedule or exhibit A. That way, as new fees are introduced the sales agent will get paid its percentage on these new revenue resources.
The next thing to address is what if any buy-rate there should be for new fees. Many agent agreements provide that in essence the processor can make up whatever buy rate they want for the new fee. Obviously this would give the processor the right to capture a greater percentage of the profits derived from any new fees. To counter this, the sale agent should make sure that in the agent agreement it states that as to any new fees, the processor can only use any third party costs it is charged by its vendors as the buy rate for any new fees.
However, many processors are becoming reluctant to limit their right to set buy rates on new fees. They argue that there are additional costs associated with these new regulations and card association rules and they need to be able to have the flexibility to pass those costs along to their sales agents. If that is the case, the next best thing to get incorporated into the agent agreement is a provision that states that if the processor is going to set a new buy-rate for you, that it must be the same one they set for their entire sales agent base. That way at least if you are a sales agent you will not be singled out for a higher buy-rate and also that you will have a lot of other angry sales agents beside you to fight any exorbitant buy-rates that are instituted.
Fee based income is here to stay. As a sales agent, it is your job to make sure you get as much of it as you can by incorporating provisions in the agent agreement that allow you to do so.
The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change. Please consult an attorney before making a decision using only the information provided in this article.